Cantons compete for the golden taxpayer

Boris Becker outside his new company offices in canton Zug Keystone Archive

The German tennis ace Boris Becker is just one in a long list of well-heeled individuals attracted to Switzerland by low tax rates in some cantons.

This content was published on October 26, 2003 - 11:57

But the pressure to attract wealthy taxpayers has fuelled an ongoing, and often bitter rivalry between Switzerland’s 26 cantons.

The German dairy magnate, Theo Müller, is the latest high-profile millionaire to decamp to Switzerland.

In moving to canton Zug, Müller will avoid paying hundreds of millions in inheritance tax to the German fiscal authorities.

Some argue that the competition among the cantons not only hurts the country overall but leaves some regions condemned to relative poverty.

Because cantons, and the local authorities within them, are responsible for levying the lion’s share of an individual’s tax burden, the differences between regions and even suburbs and villages can be marked.

A married couple with an annual income of SFr100,000 ($76,000) can pay anywhere between SFr6,100 to more than SFr21,000 in direct cantonal and local authority taxes, depending on where they live.

And for cantons that manage to reduce taxes, the benefits can be considerable.

The turnaround canton

A generation ago, the inner-Swiss farming canton of Schwyz was one of the country’s poorest.

But once it slashed taxes the canton’s fortunes turned.

Schwyz is now ranked seventh among Switzerland’s cantons, and has seen its population surge from around 100,000 to 130,000 while the number of companies listed there has trebled.

The Schwyz model is one that other cantons are increasingly eager to follow.

Residents in the northern Swiss border canton of Schaffhausen are due to vote on a plan to slash taxes for wealthier residents, families and companies.

The canton, which is ranked 18th in Switzerland, hopes to attract wealthy individuals by offering large tax cuts to those earning more than SFr500, 000 per year or with assets of more than SFr10 million.

Forced to compete

Stefan Bilger, the canton’s finance department secretary, told swissinfo that any increases in overall tax revenues would then be passed on to ordinary taxpayers.

“If the tax measure works everybody benefits,” said Bilger.

Bilger said the move was motivated by the fact that Schaffhausen faces stiff competition from its low-tax neighbours in and around Zurich.

“It’s a fact that there is unhealthy competition in taxation between the cantons. But we can’t change it, and we have to live with it and take measures to compete.”

Bilger said the proposed tax cuts would initially cost the canton SFr4.2 million per year until it reaches a forecast break-even point in 2007.

Winners and losers

However, unlike Schaffhausen, which is close to the economic powerhouse of Zurich, poorer regional cantons such as Jura or Valais have less room to manoeuvre.

Cutting taxes means less money for schools, hospitals or roads.

And while the federal government seeks to redress such imbalances by providing tax holidays to companies that establish themselves in economically depressed areas, competition among cantons continues unabated.

Critics of the Swiss system argue that the competition hurts the country overall, by forcing regions to make their rates as low as possible to attract companies or wealthy individuals.

But Howard Rosen, the chairman of the British-Swiss Chamber of Commerce and owner of a Zug-based law firm, told swissinfo that tax rates were only part of the equation.

“It’s not just the tax rates that make Zug. It’s about infrastructure, access to airports and the multicultural environment that make the difference,” said Rosen.

“People who think it's all about taxes are mistaken,” he added.

And while companies may favour certain cantons, they still pay federal taxes to the benefit of all Swiss, Rosen said.

Homeless rich

But not everything favours Switzerland’s richest cantons.

Zug, arguably the country’s best-known tax haven, is one of the most difficult places to buy property.

Although Becker reportedly intends basing his new business there, local newspapers joked that his biggest challenge would be finding a mansion to live in.

In Zug, demand among millionaires for luxury accommodation far outstrips supply.

And because some local authorities rely heavily on a handful of super-wealthy residents, a sudden drop in their income can have a major impact on all taxpayers.

A case in point is the picturesque hamlet of Freienbach, on the shores of Lake Zurich – which is also home to the troubled financier, Martin Ebner.

Following the stock market collapse, Ebner’s taxable wealth crumbled from several billion francs to around SFr100 million.

To cope with the sudden shortfall in revenue, the town of Freienbach will next year increase its taxes by 20 per cent.

swissinfo, Jacob Greber in Zurich

Key facts

The federal government, cantons and local authorities charge taxes on individuals and companies.
Most personal income tax goes direct to cantons and local authorities.
A married couple earning SFr100,000 could pay between SFr6,100 and SFr21,000 depending on where they live.

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